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No, it isn't. Definitely not yet. While the dollar's reputation has been damaged by the Bush years, the dollar made its way through two world wars and the col

by mdasen 18y ago

No, it isn't. Definitely not yet. While the dollar's reputation has been damaged by the Bush years, the dollar made its way through two world wars and the cold war without the problems that most European currencies faced. As Warren Buffet says, "It takes 20 years to build a reputation and five minutes to ruin it." And it's true that while the dollar won't be seen in the pre-Bush light for a couple decades, it's not as if it's been replaced (yet). The euro has done well in its 10-year history and has been wonderful for Europe (both stimulating trade and creating stability - I'm a huge euro supporter), but it's only existed for 10 years in what has been a relatively safe economic time. This is the first real test of the euro and we are far from seeing how it is faring. Exchange rates aren't a good way of measuring a currency, even though they would seem like one. The fact is that currency valuations are usually tied to the interest rates you can earn in banks of that currency. The ECB (European Central Bank) has always kept interest rates high. That encourages people to change dollars into euros and deposit them in European banks which drives up the price of the euro in foreign exchange markets. However, high interest rates also discourage the investment in businesses that drives an economy. So, one can't say that the euro's strength benefits its people. And that's what you need to do: to look at how a currency is serving the people under it. The Federal Reserve has proven over decades that it can effectively fight both booms and recessions. In a recession, one needs to expand the money supply. That makes it easier for borrowing and therefore investing and spending - exactly what we're seeing missing from our current situation. People have stopped borrowing, investing, and spending because of the high cost of it (compared to boom times) and so by making it easier to do those things we can mitigate some of the pain of the recession and make the whole recession shorter as we more quickly encourage business to return to normal.* The ECB has lowered interest rates, but the ECB's policy has always been to target inflation and not mitigate recession. Partly this comes from differences between Europe and America. Europe has had many currencies in the past that just free-fell. Inflation was terrible, currency unstable, etc. Likewise, governments have large social programs in Europe and high unemployment is seen as a way of life rather than a disaster. For example, in Germany 8% unemployment is amazing. In the US, we call for politicians' heads when it hits that level. But European countries are more capable of handling such unemployment without huge upheaval because the social programs keep people at bay and without as much worry about a paycheck. *This is the consensus of mainstream economics in the same way that the existence of global warming is the consensus of mainstream climate scientists. Yes, you can always find those who will disagree with anything.

enra 18y ago
Euro isn't like the "most European currencies" and the past isn't a clear indication of the future. Wars are much different times than the mess that we are dealing with now. I also agree on the ECB goals that controlling inflation and stability is much more important than controlling booms and recessions. It is not even that much possible to do that with euro since countries economies are not similar or fully synched. Extensive monetary control could lead to big asynchronous problems. I agree that we have to see how well euro will do in the future.
- mdasen 18y ago
  Yeah, the euro is being managed quite well. In terms of recession vs. inflation control, most central banks don't see recessions as their domain at all. The ECB wades into it more than probably any except the Fed and it's probably a good thing. Most people hate the idea of manipulating money to deal with recessions and booms - heck, it pisses me off. It's not a good situation - it's often like picking political candidates; you choose the lesser evil. What people worry about with recession targeting is that it will cause inflation. It can and many countries have shown very bad results with it. The problem occurs because, as you expand the supply of money, each individual unit is worth less of the pie. That's ok for a short while. The problem that most countries get into is that they don't stop it when things get better or that there's a perception that they won't stop it when things get better. While the Fed plays a little looser than I would like, they've shown that they can effectively target recessions without causing inflationary problems by having long-term discipline. And people accept that it won't happen because of the Fed's history of it not happening. The ECB, while young, enjoys a good reputation and that's why they felt that they could continue to push rates down to target the recession (although not as strongly as the Fed has). They know that people accept that they have a good long-term monetary policy that won't just continually expand the money supply as many countries have. In terms of economies not fully synched, I don't fully see it. I mean, the economy of Massachusetts isn't going to move lockstep with the economy of Michigan. They're incredibly different - probably more different than, say, the economies of Germany and France. What makes the economies of different countries different? Differences in workforce, differences in natural resources, differences in industries. . . All of those vary regionally in the US. Iowa and Nebraska's farming economy aren't anything like Massachusetts' biotech economy. And, what we're seeing right now is that Europe is affected as a unit by this recession (or as much as ever happens). You can always make the case that you can subdivide something to be more accurate, but for practical purposes coming together works well. Do you think Europe is more diverse than the US in this way? That's serious because I could be overlooking something big that's just not on my mind after being up until 4am last night. The euro has been one of the greatest things to happen to Europe. It's not mismanaged and has a bright future, but it's premature to say that it's the new dollar. That would be like saying Linux is going to replace Windows on people's desktops. It might happen. Linux is good. It's gaining favor every day. It might be better. However, it will still be a good while before Windows is displaced if it ever is and it's premature to assume it will be.

by mdasen 18y ago

enra 18y ago

Euro isn't like the "most European currencies" and the past isn't a clear indication of the future. Wars are much different times than the mess that we are dealing with now. I also agree on the ECB goals that controlling inflation and stability is much more important than controlling booms and recessions. It is not even that much possible to do that with euro since countries economies are not similar or fully synched. Extensive monetary control could lead to big asynchronous problems. I agree that we have to see how well euro will do in the future.

mdasen 18y ago
Yeah, the euro is being managed quite well. In terms of recession vs. inflation control, most central banks don't see recessions as their domain at all. The ECB wades into it more than probably any except the Fed and it's probably a good thing. Most people hate the idea of manipulating money to deal with recessions and booms - heck, it pisses me off. It's not a good situation - it's often like picking political candidates; you choose the lesser evil. What people worry about with recession targeting is that it will cause inflation. It can and many countries have shown very bad results with it. The problem occurs because, as you expand the supply of money, each individual unit is worth less of the pie. That's ok for a short while. The problem that most countries get into is that they don't stop it when things get better or that there's a perception that they won't stop it when things get better. While the Fed plays a little looser than I would like, they've shown that they can effectively target recessions without causing inflationary problems by having long-term discipline. And people accept that it won't happen because of the Fed's history of it not happening. The ECB, while young, enjoys a good reputation and that's why they felt that they could continue to push rates down to target the recession (although not as strongly as the Fed has). They know that people accept that they have a good long-term monetary policy that won't just continually expand the money supply as many countries have. In terms of economies not fully synched, I don't fully see it. I mean, the economy of Massachusetts isn't going to move lockstep with the economy of Michigan. They're incredibly different - probably more different than, say, the economies of Germany and France. What makes the economies of different countries different? Differences in workforce, differences in natural resources, differences in industries. . . All of those vary regionally in the US. Iowa and Nebraska's farming economy aren't anything like Massachusetts' biotech economy. And, what we're seeing right now is that Europe is affected as a unit by this recession (or as much as ever happens). You can always make the case that you can subdivide something to be more accurate, but for practical purposes coming together works well. Do you think Europe is more diverse than the US in this way? That's serious because I could be overlooking something big that's just not on my mind after being up until 4am last night. The euro has been one of the greatest things to happen to Europe. It's not mismanaged and has a bright future, but it's premature to say that it's the new dollar. That would be like saying Linux is going to replace Windows on people's desktops. It might happen. Linux is good. It's gaining favor every day. It might be better. However, it will still be a good while before Windows is displaced if it ever is and it's premature to assume it will be.